November 21, 2007
Anyone who doubted the severity of the property slump here only has to look at the shares of the Irish banks. Last night, they were all touching new lows.
For those still in denial, consider that all the major banks here have lost over 50pc of their value since May. The reason is very simple — a housing recession is upon us and the banks are the only liquid stocks that investors who want to be protected from the downturn can sell.
It is highly likely that some of the same developers, who are now caught with property that they can’t sell, are the very ones speculating against the banks that gave them the leverage to buy property in the first place. Selling the banks is a logical hedging mechanism.
So, in the boom, the developers borrowed from the banks, helping to drive bank shares upwards by actively buying stock; today, they might be selling bank shares in an effort to reduce their exposure to the Irish property market!
JP Morgan once said that “nothing so undermines your financial wisdom as the sight of your neighbour getting rich”. This certainly held during the boom. Now that we are at the early stages of a recession in the housing market, the expression of John Maynard Keynes, with respect to financial markets, is apt; to those suggesting that share prices had fallen far enough in a slump, the great economist opined, “these markets can remain irrational, longer than you can remain solvent”.
So, in the case of Ireland, the upswing was made more dramatic by the behaviour of banks who lent to every Tom, Dick and Harry. This was normally a transfer of risk on the banks’ balance sheets as, in many cases, they had financed the developer who built the development in the first place. The banks took the view that, in a downturn, it is better that their risk be spread across hundreds of first-time buyers, rather than one big-fist developer.
The government, which gets 28pc of the price of every new house, was quite happy to keep the bubble inflated. As late as September, those who suggested that Ireland’s property market was the scam that it is, were denounced as “unpatriotic” by the Taoiseach. Well, by the looks of things, we’re all unpatriotic now! Even his dauphin, Brian Cowen, was uttering treasonous words yesterday, suggesting that government revenues were faltering because of the slump in the property market, “which had to happen”.
Hold on a second minister, you did not expect this. The minister and all the other cheerleaders were not forecasting that six months ago! Back then, the script — repeated like a mantra by every estate agent, stock broker, banker and politician — was that the economy was in great shape, a little tinkering with stamp duty and everything would be fine. So, these vested interests were still luring the average young worker into the fraud of houses that cost 15 times the average salary but which have no resale value.
Rather than observing their democratic responsibility, which should put them on the side of the people, this government and, worse still, the Fianna Fail party, stayed firmly in the pockets of the big developers. Instead of warning the average Joe that things might not be so rosy, they continued to talk up the housing market, when it was clear to anyone with even the slightest grasp of Junior Cert economics that our miracle was nothing but a large overdraft.
In reality, the thread that spun the tangled web, which linked government revenues to house prices, bank share prices and negative equity, is five years of economic mismanagement.
This shouldn’t come as a surprise to any of our top politicians, as it was they who presided over an economy that became totally interlinked with the fortunes of the housing market. To say that the economic debate became hijacked by property developers and their political and financial concubines, would be an understatement.
Now, we are facing the exposure of subprime mortgage practices in Ireland, which Davy Stockbrokers, in a report early this year, suggested might grow from â‚¬600m, now, to â‚¬4bn by 2010. The report implied that 10pc of the total Irish mortgage market could be subprime in a few years. However, this won’t happen, as the subprime market is dead.
A few days ago, a board member of Central Bank privately suggested that Ireland did not have a subprime issue and went on to congratulate the Central Bank and its ECB colleagues for their speedy injection of funds into the European markets when this crisis broke, in August.
However, the problem with subprime is that it is only the thin end of the financial wedge. Subprime is only a name; the real problem is not the name, but the predatory lending we have seen in Ireland over the past few years.
In my book, a subprime lender is anyone who lent 100pc of the value of the asset, as well as a loan to cover the costs of fit-out, while varying the interest rate by using a sweetener in the first year. In addition, this lender extended the credit over a 30-year period, to a borrower who was being terrified daily by estate agents telling them to get in now, or else pay more next year. This is what was happening in Ireland. And, finally, we have the dominant government party that is financed by the very developers who are driving the whole scam in the first place.
This is what happened in Ireland. The minister’s crocodile tears for the lost boom are not believable. The slump in bank shares is simply the corporate equivalent of the pain being felt around the country as people realise that the era of easy cash is over. Now, the hard part begins.
The Government has options, but we need vision — much more than the semantics and budgetary whitterings we heard from the minister yesterday. In the words of his erstwhile cabinet colleague — it is now time to be radical or redundant.